Invest
Plenty of value outside of the big end of town
While investors are naturally attracted to large caps, it’s smaller companies that offer the best value.
Plenty of value outside of the big end of town
While investors are naturally attracted to large caps, it’s smaller companies that offer the best value.
The point of investing in global equities is to exploit the full breadth of opportunities the equity universe has on offer, not to be dominated by exposure to companies whose market caps are larger than the GDP of most African nations.
The 10 largest companies in the MSCI World Index make up 11 per cent of the total index weight. This time last year, in the State Street Global Equity Fund we held none of the ten largest, but today we hold two of them. For example, some large banks have become more attractive on valuation and risk characteristics.
The 50 largest companies in the MSCI World Index, the smallest of which is US$105 billion in market cap, make up almost 30 per cent of the weight of the index. We have found eight worth investing in, amounting to around 10 per cent of the fund’s weight. Staples and healthcare have been the dominant exposures in this capitalisation segment.
The 100 largest companies make up more than 42 per cent of the market cap of the MSCI World Index, and we have found 11 companies attractive enough to include in the fund, but which only amount to 13 per cent of the fund weight. That leaves the other 87 per cent of the fund to invest in companies outside of the big brands.
What is there beyond the mega caps?
While SSGA’s expected return on the mega cap stocks as a group (the largest 100 companies) is better than average, there are still 550 companies in the universe that have a higher expected return by our estimate. It’s not about avoiding large companies, it’s about opening up the opportunity set.
Smaller companies are fertile ground for finding greater inefficiencies in the equity market. There are 55 analysts providing Bloomberg with earnings estimates for Apple Inc, but only 16 analysts covering Waste Management Inc, the 246th largest company in the benchmark universe with a market cap of US$30 billion. The opportunities to find mispriced stocks are greater when fewer market participants are scrutinising them.
Less regulation in the US under the new administration could level the playing field for smaller companies, which previously would have been disadvantaged by fewer resources to allocate to lobbying for exemptions from taxation. A new corporate tax environment could be good for smaller companies in the US.
What’s the catch? Transaction costs.
Selling one stock to buy another involves trading costs. Not just explicit costs like brokerage or GST. These costs are tiny compared with the potential market impact associated with trading if seeking to transact on a large amount of a small company.
That’s why it is so important to understand with granularity what it costs to trade, and incorporate that into the portfolio construction decision.
In fact, we consider the expected return of every company in the market and weigh that against the expected volatility impact of including that stock in the portfolio and net of the expected cost to transact that stock. We demand a higher expected return or lower risk from smaller companies to include them because they typically incur higher market impact costs when trading. We also limit the portfolio’s position in any company relative to how much trading volume of that stock regularly goes through the market to ensure we are not left with a position that cannot be sold without too much market impact incurring too high a cost.
In today’s environment where breadth in portfolios helps to insulate against extreme outcomes from concentrated positions, investing beyond mega caps is an important ingredient in the pursuit of strong risk adjusted returns through active management.
Olivia Engel, chief investment officer global active quantitative equities deputy, State Street Global Advisors
Property
NAB predicts sharp slowing of property prices in 2022
The bank has revised its price forecasts for both 2021 and 2022. ...Read more
Property
Mortgage rates to rise as a result of NZ’s unexpected inflation jump
Three-year bond yields have jumped almost 20 basis points after NZ’s largest inflation rise in over a decade. ...Read more
Property
Rental vacancy rates rise in east-coast CBDs
Vacancy rates nationally remained stable during the month of September. ...Read more
Property
A first home buyer with cold feet? Here are your options
Even first home buyers can get cold feet about stepping onto the property ladder. ...Read more
Property
Demand for affordable housing set to rise
New lending rules introduced by APRA could increase the demand for units and townhouses. ...Read more
Property
Victoria launches $500m fund for home buyers
The Victorian state government has launched a new scheme that promises to make life easier for first-time home buyers. ...Read more
Property
Value of housing outstrips $9 trillion
Five, short months after hitting $8 trillion, the total value of residential real estate in Australia has surpassed a new record of $9.1 trillion. ...Read more
Property
Over 50,000 Australians sign up for government home buyer schemes
The federal government has provided an update on its Home Guarantee Scheme for first home buyers and single parents. ...Read more
How the post-lockdown period will influence property, what the soaring NFT market means, and defining financial wellness
Listen now
APRA’s mortgage crackdown, the power of DeFi and last-minute tax tips
Listen now
What to expect as the end of lockdown looms? Will the Stage 2 tax cuts boost your tax return? Where should investors be looking as the economy reopens?
Listen now
Could property prices inflate by another 20%? What’s happening in recent dividend announcements? Did your fund fail the YFYS test?
Listen now
Property
NAB predicts sharp slowing of property prices in 2022
The bank has revised its price forecasts for both 2021 and 2022. ...Read more
Property
Mortgage rates to rise as a result of NZ’s unexpected inflation jump
Three-year bond yields have jumped almost 20 basis points after NZ’s largest inflation rise in over a decade. ...Read more
Property
Rental vacancy rates rise in east-coast CBDs
Vacancy rates nationally remained stable during the month of September. ...Read more
Property
A first home buyer with cold feet? Here are your options
Even first home buyers can get cold feet about stepping onto the property ladder. ...Read more
Property
Demand for affordable housing set to rise
New lending rules introduced by APRA could increase the demand for units and townhouses. ...Read more
Property
Victoria launches $500m fund for home buyers
The Victorian state government has launched a new scheme that promises to make life easier for first-time home buyers. ...Read more
Property
Value of housing outstrips $9 trillion
Five, short months after hitting $8 trillion, the total value of residential real estate in Australia has surpassed a new record of $9.1 trillion. ...Read more
Property
Over 50,000 Australians sign up for government home buyer schemes
The federal government has provided an update on its Home Guarantee Scheme for first home buyers and single parents. ...Read more
More articles
Website Notifications
Get notifications in real-time for staying up to date with content that matters to you.
